Centrica Preliminary Results 2008
26 February 2009
Nick Luff – Group Finance Director
Thank you Roger. Good morning everybody. Let me start with the commodity price picture. You will be familiar with this of course, but we all know the oil price reached a level last year that is three times what it is today. The gas price of course doubled and then halved again. And short term electricity prices were particularly volatile right through to the end of the year, even after the general fall in commodity prices. And that backdrop obviously formed quite a difficult environment for us as an energy retailer and I think our business stood up well. The Results, as you are about to see weren’t as strong as the exceptional 2007, but the overall balance between the two half years for example was actually more consistent despite that volatility in commodity prices.
If I give you the highlights of the key financials for the Group, starting at the top, revenue up over £21 billion, that is an increase of some 31%. And that reflects the higher retail prices of course, but also some underlying growth in the business and also some foreign exchange benefits with the overseas operations, contributing more to the sterling figures.
Operating profit came in at almost exactly the same level as 2007, £1.9 billion, but with a very different mix as profits shifted to the upstream away from the downstream and I will come back in a second and give you a breakdown of that by business unit.
As Roger said, we did pay significantly more tax in 2008 reflecting the increase in the highly taxed upstream profits and that pushed the overall Group tax rate up over 50% which of course restricted earnings which came in at £904 million, an increase of about 20%.
In earnings per share terms, adjusting for the Rights Issue, that came in at 21.5 pence against the restated 27.2. The full year dividend, as Roger mentioned, we set at 12.2 pence which represents an increase on ’07 of about 5½ % continuing to meet our objective of delivering real growth in the dividend each year.
So let me turn to the individual components of the operating profit and you can see here immediately the shift from downstream to upstream. Starting with BGR, operating profit at £379 million. And within that average consumption for BGR per customer was actually slightly higher in ’08 than ’07. Average customer numbers were slightly down and those two roughly offset each other. But of course we did see higher retail prices with the increases we put through in January and July and that drove the increase in revenue which was up some 20%. Of course those price increases were a response to the higher wholesale gas and power prices that we were seeing and that is reflected in the commodity costs which were up some 40%. We also saw higher transmission and metering costs, although they were partly offset by a continued reduction in our control of operating costs as you see on the right there.
Overall, put that together, gave the operating profit of £379 million which represents a margin of some 4.9%, slightly below our long run target, but we think a good performance, given we are operating off quite a high revenue base in 2008 and of course given the wholesale volatility that we saw.
BGB had another good year, actually adding customers through the year, even before the E4B and Bizz Energy deals towards the end of the year. And that increase in customer numbers, together with high gross margins and continued cost efficiency, delivered that operating profit of £143 million. And that is a particularly good result when you take into account we had a £30 million negative year over year impact from the ending of that historic favourable electricity procurement contract that we talked about in the past.
Services also had a good year, their operating profit up almost 30%. Here we increased product holdings, particularly in plumbing and drains and our home electrical services. And continued cost efficiency allowed us to drive margins up close to our 15% target.
Moving upstream, Centrica Energy, up about a third to £879 million but quite a lot of moving parts behind that. Obviously as you would expect, the gas production business, profits there up quite substantially, but offset by the legacy I&C contracts moving back into loss. As far as volumes are concerned in gas production, volumes are up about 7%, slightly less than we have been expecting as we did not run Morecambe quite as hard in the last couple of months as commodity prices were falling. But of course the average selling price that the gas production business was achieving was much higher through the year, particularly in the middle part of the year, overall up some 90% to 59 pence per therm.
Power generation, our volumes there up about 18%. However we did have some unplanned outages at the wrong time and some forward selling denied us the full benefits of those higher spark spreads we were seeing and as a consequence the result was somewhat disappointing, only just above break even.
Storage, returns here continue to be very high. That £195 million represents a pre-tax return on capital of over 50%. Not quite as high as 2007, we did see a narrowing of the summer/winter gas price differential which did squeeze the SBU price which was down about 25% to 44 p. But nevertheless it was a very strong performance.
Direct Energy also had a good year and we see in sterling terms the result is flattered somewhat by the weakness of sterling against the US dollar and Canadian dollar, but even in constant currency they actually produced higher profits, despite the difficult commodity price environment they faced, up about 4%. Within that the mass markets business actually came in a little bit better than we were expecting. The last couple of months of the year we had cold weather which drove consumption, but actually did not push up the wholesale gas price, so the margins remained strong. And that enabled us to offset the negative impact from Hurricane Ike earlier in the year.
C&I Business is now beginning to produce meaningful profits and is very well placed with the Strategic Energy acquisition we did in the middle of the year and now fully integrated. In contrast the services business is struggling in the difficult economic environment in the US and unlike the UK services business, it is directly exposed to the residential and new construction market which is certainly having an impact.
And upstream, obviously gas production did well with the high prices, but also volumes there were up quite substantially, up some 20%, partly due to the Rockyview and TransGlobe acquisitions that we made in the early part of the year. That was offset by lower generation profits reflecting lower volumes as the spark spreads for our Texas power stations were low.
And finally, in the operating profit, we have the very disappointing loss from the European businesses, all of which was attributable to our Dutch business Oxxio. Oxxio did struggle with the volatile commodity price environment against vertically integrated incumbents. As Roger mentioned, we didn’t get everything right internally. We didn’t get our procurement right, and we also had some billing issues which emerged towards the end of the year and all that resulted in a loss of £63 million. In addition, you might see in the exceptional items we took a charge for £67 million for Oxxio, £45 million of which is a write down of their goodwill.
SPE, elsewhere in Europe. Here of course still accounted for as an associate, so that is after interest and after tax and just our 25% share, small profit of £8 million. 2009 of course will be quite different for SPE. We now have a 51% ownership. So we will be consolidating it and SPE itself will be benefiting from the Pax Electrica arrangement, under which it gets access to favourably priced nuclear power and power under that agreement started to flow just this week.
So that’s it on the operating profit. If I will turn now to the cashflow and quite a lot of moving parts here as well. But to pick up the highlights for you. EBITDA remains strong, getting close to £2.6 billion. However we did have to invest over half a billion in working capital, reflecting the increase in retail prices which pushed up receivables in the downstream businesses. And we also had some very significant swings in margin cash with the commodity price volatility, we had a lot of margin cash coming in during the first half of the year and out during the second half of the year. The net result, an outflow for the year as a whole of £500 million, £556 million. And at the year end, if you look at the bottom there, we were sitting in a position of margin cash out of £626 million.
In addition, of course we had higher cash tax payments because of the increase in the upstream profits. We also invested more in the business Capex of £1.2 billion and I will come back and give you a breakdown of that in a second.
Foreign exchange also affected the net debt of course as our dollar debt and our euro debt was revalued with the fall in sterling. And of course on the cashflow you see the proceeds from the Rights Issue coming in at £2.1 billion just towards the end of the year. All that left us with net debt at the year end of just over half a billion and if you adjust for that margin cash of £600 million, we actually had no net debt at all.
Coming to the Capex and starting with ’08, obviously the main items as you see are in the UK power business. We have the continued stage payments on Langage, the gas fired power station that we are building in Devon that is now expected to come into service towards the end of 2009. And in addition we had the payments on the wind farms that are in Lynn and Inner Dowsing Windfarm which we completed towards the end of ’08.
As well as the internal Capex, you see down the bottom there, we had 430 odd million of investments in acquisitions, the main ones being Strategic Energy, the US C&I business, Heimdal the Norwegian gas acquisition, Caythorpe, the UK onshore storage project and the two Canadian upstream deals that I referred to earlier.
If I look forward into ’09 you can see we are expecting to spend significantly more on upstream gas for the UK market and that reflects the development programmes that came with the Newfield and Heimdal acquisitions and of course we have got the final stage payments on Langage as that’s completed. This year, also if you look at the acquisitions figure, £760 million, that is the acquisitions we have done or are committed to so far and of course it is mainly SPE. It does include the capital contributions that SPE itself has to make to the Pax Electrica arrangement. Also note that we are expecting to spend significantly more on ROC’s and emissions in ’09 than we did in ’08. None of those ’09 numbers of course include anything for British Energy nor indeed any other acquisitions we might make. And also it is worth saying we might, depending on the economics, we might invest in more in the UK wind business as well during the year.
Turning to the balance sheet where you can see capital employed up to close to £5.5 billion, reflecting investments we have made in the business. Our tax liabilities on the balance sheet actually came down reflecting the deferred tax credits on the derivative mark to market position at the year end.
On pensions, the schemes have moved back into deficit, reflecting the fall in the equity markets, albeit that was cushioned by the increase in corporate bond yields, which IAS19 requires us to use for discounting the liabilities. I think it does have to be said that the position for funding purposes it is likely to be somewhat more conservative and we do anticipate increasing cash contributions into those pension schemes over time.
Net debt, half a billion as I described earlier, leaving net assets around £ 4½ billion. We have of course had a very strong funding position as well as the Rights Issue, we issued £1½ billion of bonds in the second half of the year and during the first half of ’08 we had already extended over a billion pounds of bank debt out to 2012. And that left us with a very strong position at year end of a total of £4.3 billion of cash in undrawn facilities. We are planning, assuming the BE deal goes ahead, we are planning to cover half the cost of that with using the new debt facilities or possibly partly through asset sales, those new debt facilities being additional bond issues or
potentially acquisition finance from banks. The other half we would cover out of our existing facilities and if you take the effect of using the facilities for that purpose and adjust for the cost of buying SPE as well, then that year end figure comes down on a pro forma basis from £4.3 billion to £2.2 billion and that is sufficient to allow us to cover our, the swings in working capital margin cash we have to deal with in business and leave us room for further investment as well.
And finally from me, the outlook for 2009. The year has started well. We had a combination of cold weather which of course is driving consumption both in the UK and the North American downstream businesses, but has not flowed through to the wholesale gas price and as a result margins have been quite strong.
Looking out for the rest of the year, the lower commodity prices have enabled us to reduce retail prices both in the UK and in Texas, and will also help us to absorb the increase in bad debt we do see as likely to happen, given the economic climate.
The lower gas price of course will mean lower returns from the gas production businesses on both sides of the Atlantic and also from storage and in addition the power generation business, although we do expect it to do significantly better than 2008, it will be impacted by the lower spark spreads we are seeing and of course by the delay in the coming into service of Langage.
Against that the legacy, I&C contracts of course are significantly less painful at low gas prices. And you might have seen in the announcement, we have closed out one of the more significant loss making contracts within the I&C segment and that will help the reported result. And notwithstanding the economic climate, we do continue to see prospects of good growth from BGB and BGS helped by the integration with BGR that Sam will talk about. Direct Energy will benefit from its recently reported result from the weakness of sterling. And in Europe we have taken action to stem the losses in Oxxio and we will benefit from consolidating SPE and it in turn will be benefiting Pax Electrica as I described earlier, albeit that has come perhaps a couple of months later than we had originally had hoped for.
With the shift of profits back to the downstream at least based on current commodity prices, that would lower our tax rate of course and taking that as a whole, the existing business is on track to deliver growth in 2009. The main variable of course as ever being how wholesale gas and power prices turn out and how they impact on the retail prices.
As you have seen, we are sitting on significant cash right now, with interest rates being quite low that is obviously a significant drag on earnings. We are looking to deploy that capital into British Energy and into other potential investments. But of course, the timing of those investments will have a significant impact on how EPS turns out for 2009.
And with that I will hand you over to Sam.